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INNOVATION AND GROWTH WITH FINANCIAL, AND OTHER, FRICTIONS
Author(s) -
Chiu Jonathan,
Meh Cesaire,
Wright Randall
Publication year - 2017
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12210
Subject(s) - endogenous growth theory , subsidy , externality , intermediation , productivity , economics , financial intermediary , market liquidity , microeconomics , industrial organization , opportunism , finance , macroeconomics , market economy , human capital
The generation of ideas and their implementation are crucial for economic performance. We study this in a model of endogenous growth, where productivity increases with innovation and where the exchange of ideas (technology transfer) allows those with comparative advantage to implement them. Search, bargaining, and commitment frictions impede the idea market, however, reducing efficiency and growth. We characterize optimal policies involving subsidies to innovative and entrepreneurial activity, given both knowledge and search externalities. The role of liquidity is discussed. We show intermediation helps by financing more transactions with fewer assets and, more subtly, by ameliorating holdup problems. We also discuss some evidence.